To RRSP or not to RRSP?
With the greatest respect for Shakespeare, this really is a pretty simple question to answer.
Putting money into an RRSP is giving money to your future self. Your future self doesn’t have an income (he/she is retired and trying to enjoy life) and so any money you can squirrel away now will be greatly appreciated by future you. In fact, retirement may depend on it. And depending on how far in advance you are willing to make these contributions they will multiply many times over before they reach future you.
As compelling as that sounds, for many, it’s still not easy and many objections rise to the surface at this time of year. Here are the most common three:
1. I think a TFSA would be a better choice.
If the future you that you are trying to help is just a few years from now and in your “working years,” then yes. If the future you is retired, then no. For one thing, a TFSA is easy to get money out of (I know, I’ve done it). There are no tax consequences, if you have invested properly there are no penalties or fees for the withdrawal, and you can replace the contributions later. You might have the discipline to leave the money in your TFSA when the car breaks down and the new one costs more than you wanted to spend. Most people can’t resist. An RRSP presents a few roadblocks in that you can’t replace money you take out, and you will pay tax. (If you are nodding your head and saying to yourself “I knew a TFSA was better,” just stop reading. You can’t be helped.)
And more importantly, unless your taxable income in retirement is going to be higher than your taxable income now, (which is very rare), the RRSP delivers considerably more in after tax dollars than the TFSA would. Many don’t believe that, but that is akin to not believing that 2 + 2 = 4. It’s just math.
2. I’m not sure I can afford to contribute to my RRSP.
I’m not suggesting you spend the money. I’m suggesting that you give it to yourself. If you “can’t afford” to do that, then your problem is a lack of a financial plan and perhaps a misunderstanding of what retirement planning is all about. If you are spending 100% of your current income and not saving a dime, then a great reckoning is coming your way. You will either adjust substantially into a lower lifestyle in retirement, or you will work essentially the rest of your life. If that’s not appealing, rethink the RRSP.
3. I have a company pension.
One of the “rules of thumb” that I often quote is this: If you are maxing out your RRSP contributions each year, you are well on your way to a solid retirement. If you aren’t, you pretty much don’t stand a chance.
One of the great things about company pension plans is that it means the company is trying to help you do the right thing. A bad thing is that far too often it makes the employee think that the company is doing everything. The RRSP limit each year is calculated by subtracting last year’s contributions (both yours and the companies) made to the pension plan. If you still have room, you need to use it or you are falling behind.
The RRSP deadline is in a few weeks (March 1st). If your notice of assessment last year said you have some room and you haven’t used it all, I suggest you start figuring out how to get caught up – if not this year at least in the years ahead. If you think you have a really good reason not to, please call. I’d love to hear it.